Raising growth finance may be easy, but building a profitable, sustainable business still requires grit, hard work and dedication. And while most businesses may not require heaps of capital right at the get-go, entrepreneurs would do well to remember the benefits of bootstrapping when starting up.
Starting a new business on a limited budget without external funding is called bootstrapping. For many entrepreneurs, bootstrapping, takes out the added pressure and risk of having an investor watching your every executive move, or the stress of having interest-heavy loans to pay back. But bootstrapping has other advantages.
At a time where start-up loans and seed investments are viable options for entrepreneurs, bootstrapping still may be your best bet when looking to establish yourself and grow. Relying on your own funds can help you to stay agile, and uncover talents you may not even know you had.
When you bootstrap, you are forced to get good at what you do fast. According to psychologists, it’s human nature to only put in as much effort as we need to for each task, even though we’re technically able to do more.
For our ancestors, resources were scarce and those who conserved the most energy could withstand the harshest droughts and outrun the fiercest predators. Understandably, we’ve efficiently evolved to expend the least amount of energy if we can get away with it.
It takes adversity to shake things up and get us out of our habits to just get by, which is what bootstrapping does for you. When things get really tough, the old proverb that necessity is the mother of invention rings true, and it becomes easier to clear your head and go into overdrive.
Entrepreneurs who have grown their business this way often say that bootstrapping is an added stress for them; their business has to succeed or its their money that’s gone down the drain. It forces you to get creative with your strategy and come up with solutions you would never have thought of.
Here are six ways to make bootstrapping less painful and more rewarding.
1. Do what you know and love
Starting a new business in an area you think is hot right now isn’t enough to guarantee success. Thriving businesses are led by founders with insider knowledge and passion for the subject matter.
For example, education software start-up Faria recently turned over $8.3 million within nine years of trading. The company was bootstrapped with the founders’ savings and a $30,000 convertible debt note.
Founder Theodore King credits their success to the fact that each of the founders attended an IB World School and went through the frustrations that millions of other students face now. “(We) knew first-hand the advantages and idiosyncrasies of the IB. We were well-placed to design a bespoke solution for it,” he says.
Initially servicing 28 schools in 2007, it now counts more than 2,200 schools as customers and has 55 per cent of the IB Diploma Programme school market. The founding team’s technical prowess aside, Faria’s success is primarily based on the founders’ passion for education and insider knowledge.
2. Equity over cash
Extra hands can be godsend when you’re growing your business, but hiring new team member can be expensive and risky. Even large corporates find the entire hiring process risky; the cost of a failed hire can be up to 60 per cent of an employee’s annual salary. When bootstrapping, staying lean is everything.
Let your team know that their failure could mean failure for the start-up as a whole. Make sure everyone is just as passionate about the business as you are, in which case, consider offering equity and lower salaries in the growth phase. Equity is your best bet to motivate your team, and make sure everyone works to their best ability.
3. Planning is everything
Entrepreneurs who start without a plan may struggle to keep the business on an upward growth trajectory later on. It’s harder to keep tabs on spending and take stock of achievements and goals without a plan and regular updates. Many famous businesses, from Yahoo to even Apple, have tanked, or at least suffered, because their dynamic leaders have failed to plan ahead.
4. See office space as a premium
With all the essentially apps and storage banks now on the cloud, working remotely has never been easier. Most start-ups remain agile because of their ability to work anywhere and at any time. Smartphones with an email client and internet access is all you really need to run your business, but enterprise technology like Google Drive to store important documents, Microsoft Office to collaborate on projects with multiple authors, Skype for video conferencing and screen sharing, among countless others, can help you stay on top of your operations, no matter where you are physically. Office space is a luxury, especially in London, which is why when bootstrapping, remote work may be best.
More than 4.2 million people work from home according to the Office of National Statistics. That’s nearly 14 per cent of the working population and the highest number since records began in 1998. Of course, not all of them are entrepreneurs, but the benefit of working remotely goes beyond just cost.
Research from Robert Half UK revealed that HR directors believe greater employee autonomy can boost creativity and almost half (45 per cent) believe it makes employees easier to manage. While there are certain roles where remote working and full flexibility cannot be offered, through advancements in technology employees who can work just as effectively away from the traditional office environment, can continue to make sharing, communicating and collaborating seamless and secure.
5. Crack down on payment terms
Cash flow is crucial at any stage of business growth. According to a recent report from the Federation of Small Businesses, 37 per cent of UK’s SMEs have run into cash flow difficulties in the past year, forcing one in three to seek funding through overdrafts. At the extreme end, late payments and resulting cash flow difficulties have caused businesses to fail. In 2014, if payments had been made on time and as promised, 50,000 business deaths could have been avoided. In order to do what you can to protect your business from wasting precious time chasing payments, make sure you have an iron-clad invoicing process. Ask for an advance on any royalties you may have coming your way from future partners, negotiate discounts from suppliers when possible, and see if you can barter services to set off costs. It can’t hurt to ask!
6. Perfect your business model
The difference between a great idea and a great business is its revenue generating potential. Find the best way to get the most out of your product or service by tweaking your business model. Popular ways to monetise products and services include monthly subscriptions to ensure repeat customers, over one-time product sales that could cut your earning potential short.
Another popular model is one that banks on AI technology to provide around-the-clock customer service. Chat bots are very useful for e-commerce platforms, and may even get you a foot into new geographical markets, if a potential customer lands on your site and can be served at, say, 3AM.
One of the easiest, and cost-effective ways to limit your budget and your risk is to use social media to gauge market response. Does your offering seem attractive to your target demographic? Is your messaging or branding accurate in reflecting what you do? Is your customer service on point? Social media is a free laboratory to test your firm’s marketing prowess, so use it wisely before you invest time and money in rolling out your business to markets that may not be interested.
7. If all else fails…
Bootstrapping may seem to be the nobler path to entrepreneurial success, but if you overlook the romance of having toughed it out on your own, business survival may seem bleak. As it is, business survival rates in the UK are grim; four in 10 SMEs may not make it past their fifth anniversary according to ONS.
If keeping on top of your cash flow starts to strain your business performance or your relationship with suppliers, payday loans could be a stop-gap measure.
There is a reason that accounting has an entire section for receivables – it takes seemingly forever for the payments to hit your bank account. Credit card terminals pay on a net 30 basis, meaning you won’t receive the cash for over 30 days from the time of transaction. On top of that, many of them hold a 15 per cent rolling reserve to protect against chargebacks.
Client invoices need to be printed, mailed, received and returned. Then you still need to wait four business days for the check to clear. The required transaction times required for standardised methods of payment are simply unacceptable to modern businesses.
Invoice finance is another option if it’s your customers that are causing the delay in paying you within 30 days.
Once your business is in the black, growing with a limited budget can be seen as a blessing rather than a curse, helping you tap into your entrepreneurial resourcefulness and creativity to grow your business.